FOCUS: MITIGATION Key concepts and quality requirements of a carbon project Louis Perroy, ClimatEkos 1 September 2011, Vientiane, Lao PDR

Content Carbon credit standards Eligible project types for the AFOLU sector Project timing Additionality Baselines Methodology Leakage Permanence & Land eligibility criteria Sustainable development criteria and Non diversion of ODA

Content Carbon credit standards Eligible project types for the AFOLU sector Project timing Additionality Baselines Methodology Leakage Permanence & Land eligibility criteria Sustainable development criteria and Non diversion of ODA

Carbon Credit Standards Compliance market Kyoto Protocol Clean Development Mechanism –allocates carbon credits to projects which are registered with the United Nations –Credit type: Certified Emission Reductions (CERs) –More bureaucratic, complex and costly process (Kyoto Protocol Joint Implementation (JI): similar to the CDM, but can only be applied to projects occurring in Annex I countries, i.e. NOT in the developing world not applicable to this workshop) Voluntary market Characterized by multiple standards and their respective registries

Voluntary carbon standards examples REDUCING EMISSIONS - VER TRANSACTION The Voluntary Carbon Standard (VCS) The Gold StandardThe Climate, Community & Biodiversity Standards (CCBS) Accepts all project types that are supported by an approved VCS methodology or if they are a part of an approved GHG programme. Renewable energy and energy efficiency projects with sustainable development benefits are eligible. Land-based bio-sequestration and mitigation projects that also have social and environmental co- benefits are eligible. Overseeing body consists of a steering committee. Endorsed by over 49 non- governmental organizations worldwide. Developed by the Climate, Community and Biodiversity Alliance (CCBA) & other experts. More widely applicable, not as rigorous as the CDM. Very Rigorous: information going beyond the standard requirements for CDM or voluntary offset projects requirements Needs to be applied early on in project design to ensure a robust project design and local community and biodiversity benefits; No verification of carbon offsets, nor registry. Needs to be verified by another standard. Credit type: Voluntary Carbon Unit (VCU) Credit type: Certified Emissions Reduction (CER) and Voluntary Emission Reduction (VER) Depends on which standard it is verified with (e.g. VCS).

Content Carbon credit standards Eligible project types for the AFOLU sector Project timing Additionality Baselines Methodology Leakage Permanence & Land eligibility criteria Sustainable development criteria and Non diversion of ODA

Eligible Project Types relevant to AFOLU Is the project type eligible under the CDM/VCS? AreaType of projectEligibility CDMVCS Forestry Afforestation/reforestationYY Avoided deforestation (REDD)NY Sustainable forests managementNY Agro-forestry and silvo-pastoral systems NY Agricultural sectors Cropland and grazing land management NY Soil conservation managementNY Fertilizer switch or management in order to reduce N2O emissions YY Bio-digestions and other methane based project in the agricultural sector YY Livestock managementYY Energy related projects in the rural and agricultural sectors Biofuels ProjectsYY Fuel switch projects (ex. coal and biomass) contributing to the UNCCD mandate YY Small scale renewable energy projects (ex. small hydro combined with forestry activities for protection of watersheds) YY Energy efficiencyYY

Content Carbon credit standards Eligible project types for the AFOLU sector Project timing Additionality Baselines Methodology Leakage Permanence & Land eligibility criteria Sustainable development criteria and Non diversion of ODA

Project Timing CDM Crediting Period Forestry Projects 20 years renewable twice or 30 years Other project types 10 years OR 7 years renewable twice VCS Crediting Period Forestry Projects 20 years mini and 100 years maxi Other project types 10 years OR 7 Years renewable twice

Content Carbon credit standards Eligible project types for the AFOLU sector Project timing Additionality Baselines Methodology Leakage Permanence & Land eligibility criteria Sustainable development criteria and Non diversion of ODA

Additionality Emission reductions must be additional to any that would occur in the absence of the project. (Kyoto protocol (art. 6.1), CDM modalities and procedures (art. 43)) Interpretation: Show that the project is not the business as usual scenario … Demonstrate the intent to reduce GHG emissions Reason: Credibility and environmental integrity of the Kyoto protocol and the voluntary market projects For every CER issued by the CDM Executive Board, someone will be allowed to emit 1 additional tonne of CO2 This additional 1t CO2 emitted must be compensated by a real, additional t CO2 reduction in a developing country Additionality also applies for projects in the voluntary market!

How to demonstrate additionality EB 39, Annex 10 Large-scale projects – additionality needs to be demonstrated by taking the project through the different steps of the additionality tool Small-scale projects – additionality can be demonstrated by showing that the project would not occur as a result of just one of the barriers outlined in the additionality tool

Content Carbon credit standards Eligible project types for the AFOLU sector Project timing Additionality Baselines Methodology Leakage Permanence & Land eligibility criteria Sustainable development criteria and Non diversion of ODA

Baseline Emission reductions must be additional – but reductions compared to what? The baseline for a CDM project activity is the scenario that reasonably represents the anthropogenic emissions by sources of greenhouse gases that would occur in the absence of the proposed project activity. (Marrakech Accord, 2001) Baseline development is critical to estimating credits potential and proving additionality.

Examples of baseline determination Schematic baseline representation for e.g. a renewable energy project Schematic baseline representation for forestry projects Emissions reductions = Emissions in baseline scenario – Emissions in project scenario

Content Carbon credit standards Eligible project types for the AFOLU sector Project timing Additionality Baselines Methodology Leakage Permanence & Land eligibility criteria Sustainable development criteria and Non diversion of ODA

UNFCCC Baseline and Monitoring Methodologies Methodologies: Rulebooks for calculating the amount of carbon credits generated by a project Follow framework of the respective carbon credit scheme, for instance, the CDM or the VCS, but are much more detailed In the VCS, the CDM and CCAR methodologies can be used; new, VCS specific methodologies can also be developed

Content Carbon credit standards Eligible project types for the AFOLU sector Project timing Additionality Baselines Methodology Leakage Permanence & Land eligibility criteria Sustainable development criteria and Non diversion of ODA

Leakage Leakage refers to: Emissions arising from activities that are displaced rather than addressed and reduced, e.g., activity shifting to neighbouring piece of land Examples of leakage drivers in forestry projects

Content Carbon credit standards Eligible project types for the AFOLU sector Project timing Additionality Baselines Methodology Leakage Permanence & Land eligibility criteria Sustainable development criteria and Non diversion of ODA

Permanence (land use projects only) Permanence is an issue in land use sector projects due to the risk of biomass loss How to ensure that the carbon reductions achieved by the sequestration of atmospheric carbon into biomass translates to permanent benefits, and that sequestered carbon will not eventually be released back to the atmosphere? CDM: Rigorous approach. Temporary credits are issued (t-CERs and l- CERs) of limited validity, that are re-issued if biomass is still in place. VCS: A safety buffer of carbon credits has to be reserved and cannot be sold by project. The credits are used to compensate a potential loss in biomass. Size of buffer depends on project risks. Portfolio approach: Several private and public sector actors use portfolios containing a variety of carbon projects in order to spread the risk of losses- the under-performance or non-permanence of one project will be compensated by another project.

Land Eligibility Issues for forestry projects CDM restricts activities to tree planting Only lands that have been without forests since 1990 can be used for A/R projects: to avoid perverse incentives demonstrate that project activity land was not covered with forests in 1990 and the site is not covered with forests at the project start Ranges for forest definition has been specified by the UN Minimum crown cover: 10-30% Minimum height at maturity of vegetation: 2-5 m Minimum area: ha Individual countries need to fix the forest definition as per these ranges VCS allows the use of lands that have been without forest for at least 10 years at the project start VCS does not use these definitions: within this standard, re-vegetation with shrubs or small trees are also eligible

Content Carbon credit standards Eligible project types for the AFOLU sector Project timing Additionality Baselines Methodology Leakage Permanence & Land eligibility criteria Sustainable development criteria and Non diversion of ODA

Sustainable development criteria and Designated National Authority Assisting the host country to achieve sustainable development priorities is one of CDM priorities project must satisfy sustainable development criteria of country to get Letter of Approval (LoA) Parties participating in the CDM shall designate a national authority for the CDM check to see if a Designated National Authority (DNA) is in place. Each host country government has developed sustainable development criteria and sustainable development indicators. Set of sustainable development criteria to be decided by the country, but generally revolve around environmental, social and economic features These criteria are not mandatory in the VCS or GS, but it is advisable to apply them to ensure the environmental and social co-benefits of the project. Environmental and social co-benefits need to be proved for the CCBS.

Non-Diversion of Official Development Assistance CDM requirement: If a carbon credit project is financed by public funds, the purchasing of the carbon credits must not result in a diversion of ODA. The statement refers to the CERs generated by the project and not to the financing of the project itself; CERs resulting from ODA financed projects that are provided to the donor as a return to the public funding are seen as a diversion of ODA; Public funding sources for the project itself are allowed, as long as it is clearly stated that the CERs generated by the project are not considered as a compensation to public funding. If ODA is used in project finance, there are several options: The government of the donor country confirms through a letter that the public funding of an emission reduction project has not resulted in diversion of ODA. ODA sources are used for project finance, but not for purchase of carbon credits separate streams of finance. The credits remain with local project partners (donation) and are re- invested.

Land use sector in the carbon market UNEP Risoe, 2011 and EcoSystem Marketplace, 2010 Compliance market Voluntary market Only the minority of these are rural projects There are several opportunities, especially in forestry and sustainable land management that can be pursued on the global carbon markets. However, market shares of these projects stay behind the potential, especially in the compliance market

Challenges to land use sector mitigation Economic & structural challenges Often revenues are not sufficient to make the project financially viable low profitability, less interest from investors WHY? In general low profit sector (not industrial!) Long time to generate return on investment Matter of scale: smaller area, fewer carbon credits A multitude of stakeholders provide complex cases for investment and contracts

Challenges to land use sector mitigation (ctd) Institutional challenges The CDM has treated AFOLU projects very restrictively, hence the most important and dominant carbon market mechanism has not offered a high level of opportunities for the sector WHY? CDM Forestry: only A/R, no forest conservation CDM Agriculture: mainly methane reduction, little land management, no soils management Very complex methodologies, difficult to develop and follow! Very difficult to monitor and verify Slow administrational process: first methodology in 2005, first project in 2006

Carbon market framework necessary changes The following changes would need to be implemented to the carbon market framework: Simplify procedures Lower transaction costs Broaden eligibility criteria for land-use, land-use change forestry activities (e.g. including more weight for Sustainable development criteria) Making avoided deforestation projects eligible Preferred treatment projects that combine benefits of different conventions

How to encourage AFOLU mitigation projects Carbon fund: money assigned to build a project portfolio that is expected to deliver a certain volume of carbon credits Purpose of carbon funds: easier for buyers to pay in sum of money and receive carbon credits in return, often at low price easy for sellers - large volumes being taken off Role of carbon funds: Market pioneers, e,g. World Bank funds can go into new, untapped sectors Willing & able to accept higher risks Often promoting specific sectors, e.g. Carbon Partnership Facility

Examples of World Bank Carbon Funds for AFOLU BioCarbon Fund for projects that sequester or conserve carbon in forest and agro-ecosystems, aims to deliver cost-effective emission reductions, while promoting biodiversity conservation and poverty alleviation. Two Tranches: I from May 2004, total capital US$53.8 million; II since March 2007, total capital US$ 38.1 million Forest Partnership Facility assist developing countries in efforts to reduce emissions from deforestation and land degradation (REDD) Two main aims: readyness for REDD countries, and then pilot incentive programs for REDD in selected countries Total capital US$ 300 million

Outlook for AFOLU Promising and important sector, also according to IPCC: outlook for GHG mitigation in agriculture suggests that there is significant potential and forestry can make a very significant contribution to a low-cost global mitigation portfolio that provides synergies with adaptation and sustainable development (AR4, 2007) Yet underdeveloped due to different reasons, among them lack of political will for forestry change of mind, more activities & investment needed. First steps are being done but need to intensify actions, measures and awareness. Number of project types that may not work under CDM, especially in forestry and agricultural sectors, which could be very successful on the voluntary market.

Outlook for Agriculture Most prominent options for mitigation are: Improved crop and grazing land management (e.g., nutrient use, tillage, and residue management) Restoration of organic soils that are drained for crop production Restoration of degraded lands Significant mitigation is possible with: Improved water and rice management Land use change (e.g., conversion of cropland to grassland) Agro-forestry Improved livestock and manure management IPCC, 2007

Outlook for Forestry REDD is seen as high potential sector that will be promoted in the coming years Deforestation is the single most important CO2 source in the land use sector, with a net loss of forest area between 2000 and 2005 of 7.3 million ha/y (FAO FRA, 2005) In the short term, mitigation benefits of reducing deforestation are greater than the benefits of afforestation Measures in the forestry sector allow for the cost-effective reduction of emissions while often also delivering development and biodiversity co-benefits.

Outlook for Rural Energy Sector that can bring very high social and environmental benefits: always interesting for the voluntary market Tendency might go towards bundling of several villages / communities with small scale activities: several hydros, windpark, etc Can play important role in slowing down land degradation

Thank You! Louis Perroy Senior Partner and CFO ClimatEkos